Reforming Credit Unions in Honduras

This paper reports the strategy used by the United States Agency for International Development (USAID) for reforms of the credit cooperatives and the results achieved in Honduras.

USAID initiated the project with the aim of organizational development and financial stabilization of the credit unions in Honduras. Four principles guided project administration. These were:

• Develop the credit union system from the bottom up;
• Form performance measures appropriate to the local conditions and use these measures in dialogues about changes in credit unions;
• Severely limit access to outside funds for on-lending;
• Strengthen the governance done by boards and managers of the credit union.

The paper informs that the participating credit unions were financially much stronger in 1997 than they were when the project began:

• The growth of credit unions in Honduras during the period was due to the overall improvement in the macroeconomic and macro finance environments in the country over these years;
• Credit unions were remarkably successful in expanding their outreach;
• The reforms adopted by the participating credit unions resulted in sustained momentum in deposit mobilization, profits, and growth in lending.

The paper concludes with some lessons:

• Some weak credit unions can be successfully reformed and they can play an important role in providing financial services;
• Incentives are critical elements in successfully reforming credit unions;
• To attract deposits, credit unions must be well managed and be perceived as being stable;
• A stress on mobilizing deposits reinforces balance between the interests of savers and borrowers.